No Economic Overheating, Powell Says, But Fresh Batch Of Data Due on Prices, GDP

The week ahead brings new PCE inflation data and the government’s second read on Q2 GDP. Powell’s Friday speech got a mostly dovish read and markets hit new highs.

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5 min read

Key Takeaways

  • Powell speech cites strong economy, reinforces idea of gradual rate hikes


  • Nasdaq and S&P 500 both post new intraday highs on Friday as Powell speech gets dovish read



  • Important inflation and GDP data due in coming week



(Monday Pre-Market) The last week of meteorological summer will begin with investors presumably digesting the latest words from Fed Chair Jerome Powell, waiting for the next round of inflation data, and watching closely as the interest rate yield curve narrows. This all comes after markets hit new highs Friday amid generally dovish interpretations of Powell’s remarks.

Powell stood in the spotlight Friday and delivered a speech in Jackson Hole that wasn’t what you’d call full of surprises. Instead, he said a lot of the things he’s said before: The economy is strong, but he doesn’t see much risk of “overheating” as far as inflation goes, and he continues to support the Fed’s gradual rate hike policy. Risks he cited included slow wage growth and rising government deficits. He didn’t mention any risk from possible trade wars.

His speech didn’t appear to change odds of another Fed rate hike next month, at least not judging from the futures market. There’s still a better than 98% chance of that, according to CME Fed funds futures. The market seemed to interpret Powell’s words as dovish, notably him saying the economy isn’t overheating. Stocks rose in the hours after he talked and the dollar weakened vs. the euro.

Still, even as Powell spoke, the gap between two-year and 10-year Treasury note yields fell below 20, reaching its lowest level in more than a decade. Some economists fear a narrowing curve could point toward economic malaise, but there’s been little evidence of that so far. Also, there was some positive news out of Europe last week, as a rise in markets there broke a three-week losing string.

The Week Ahead

More on the speech below, but first let’s take a look at the week coming up. There’s not much in the way of earnings news, but the economic calendar is pretty packed. The government is scheduled to deliver its second estimate for Q2 gross domestic product on Wednesday, followed by the closely watched Personal Consumption Expenditures (PCE) price index for July on Thursday. Both reports could potentially shed light on how quickly the economy is growing and whether that growth might be translating into inflation.

Investors might also want to consider keeping an eye on Washington, D.C, where recent political noise so far hasn’t really affected the market much, and also on Treasury notes, which have been strong lately amid a sense of caution boomeranging around the markets. Another possibly volatile area could be oil, which rose last week amid concerns about Iran. Crude oil has bounded back really quickly from recent lows.

One Man Show

On Friday, however, the focus was squarely on one man: Fed Chair Powell. He’s been very upbeat all year about the U.S. economy, and that didn’t change in his Jackson Hole speech.

“The economy is strong,” Powell said. “Inflation is near our 2 percent objective, and most people who want a job are finding one. My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.”

A lot of investors and analysts have been asking what a “neutral” interest rate might be and where the “natural” rate of unemployment should lie. Powell didn’t have the answers to either of these questions, saying, “While the unemployment rate is below the Committee’s estimate of the longer-run natural rate, estimates of this rate are quite uncertain. The same is true of estimates of the neutral interest rate.”

The Fed’s updated “dot plot” next month that shows Fed officials’ views of where rates might go in coming years could give more clues about where the Fed’s current hiking cycle might end up. June’s dot plot showed many estimates coalescing near a 3% Fed funds rate in 2019 and around 3.5% by 2020. The current rate is between 1.75% and 2%, up from around zero just three years ago.

Tariffs Get Attention, But Not From CEOs

Aside from the Powell speech, trade still commands center stage as China/U.S. talks wrapped up Thursday with no sign of any major progress. While you never want to diminish the importance of the tariff tiff between these two economic giants, it could help keep things in context if you ask yourself just how many U.S. CEOs mentioned the tariff issue during recent quarterly earnings calls. A few did, but it was a literal handful, and included some of the major multinational companies like Caterpillar (CAT), Deere (DE), General Motors (GM), and Apple (AAPL). 

Investors might want to remember that the nature of financial media coverage is often to focus on the negative, and noise around tariffs fits that particular mode of reporting. Every day you can read about how bad things are, but the market continues to make new highs. The lesson might be to pay more attention to what company leaders say they’re worried about, not some of the noise that might be out there. 

And what are CEOs worried about? Well, energy prices came up on a lot of earnings calls, especially with auto and airline companies. But tariffs didn’t make many CEOs’ talking points. As for energy prices, they remain a concern, especially with tensions on the rise between the U.S. and Iran. Oil is up sharply over the last week, but remains well below recent highs.

FIGURE 1:  Summer Doldrums? Not This Year: With the summer months drawing to a close, both the S&P 500 (SPX) and the Nasdaq (purple line) are up more than 6% since May 31, as this three-month chart shows. That’s despite the summer months traditionally being considered a slow time for stock market gains. Data Source: Nasdaq, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Getting Around: Like to drive but don’t have wheels? That seems to be the case among many U.S. urbanites today, reinforced by a new study from Cox Automotive that found 57% of urban respondents saying access to mobility is more important than vehicle ownership, a 13-point increase since 2015. Reasons for avoiding car ownership, according to the study, include options like ride-hailing and subscription programs that are increasingly popular with young urban dwellers. In addition, 48% of respondents indicated that buying or leasing a vehicle has become too expensive. “This means increasingly more consumers are looking to smart, technology-driven solutions that provide easy and cost-effective mobility over traditional vehicle ownership,” Cox said in a press release. Perhaps not the best news for the automakers, many of whom had a tough month in July. August auto sales are due the first week of September.

Information Flow: There’s been some scuttlebutt lately about the idea of companies perhaps reporting earnings twice a year instead of quarterly. Proponents say that might encourage companies to operate with the bigger picture in mind rather than simply trying to deliver the next quarter’s numbers, and there might be something to that. On the other hand, a twice a year earnings cycle might put self-directed investors at a disadvantage. It probably would mean less transparency and information for the average person trying to direct his or her 401(k), and possibly more stock volatility if a company’s situation changes dramatically after six months of silence. Volatility might be pent up by that time and be greater than if the company reported quarterly and kept investors more up to date. The Wall Street Journal’s editorial page weighed in Thursday, saying, “There’s scant public evidence that quarterly reporting hurts investment, and it’s indisputable that public markets benefit from more information.”

Sizzling Summer for Markets: That old cliche, “Sell in May and go away” sure doesn’t look like it would have been a good strategy this year. The S&P 500 (SPX) and Nasdaq (COMP) both have risen 6% or more since May 31. Nasdaq hit another new all-time high on Friday, and the SPX posted an intraday market high last week, moving back to levels last seen in late January. In spite of this, investors shouldn’t get complacent. Consider checking your asset allocation regularly, and also keep in mind that fixed income investments can sometimes help balance risk. Also, remember that with markets now at new highs and the earnings season over, it might be harder for the market to find new positive catalysts over coming weeks, and September has often been a challenging month for stocks. 


Good Trading, 

JJ

@TDAJJKinahan 

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